Q3 2019 Earnings Call
Good day, everyone and welcome to see babies third quarter 20 maintain earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Josh Duckworth. Please go ahead.
Good morning, welcome to Cincinnati Bell third quarter 2019 earnings call.
On the call today, our President and Chief Executive Officer, Leap Bar, and Chief Financial Officer, Andy Kaiser recap this quarter's highlights and provide detail what our third quarter financial performance.
Following the prepared remarks Thompson, our chief operating officer will join Lea and Eddy the question and answer session.
Remarks made on todays call that are not historical facts are considered forward looking statements that are made pursuant to the safe Harbor provision presented on slide two.
Please see todays press release and the company's recent FCC falling available on our website, where description of the potential risk.
Certainty that may cause actual results or outcomes.
Differ materially from those indicated we're suggested by any such forward looking statement.
The presentation also contain certain non-GAAP financial measures reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are also available on our website.
With that I'm pleased to introduce the Saudi belt, President and Chief Executive Officer Lee Fox.
Thank you, Josh and good morning, everyone.
That's todays release indicate our business delivered another strong quarter financial performance was strategic revenue growing 8% year over year.
Third quarter results were in line with Wall Street expectation.
As mentioned on last quarter's call. We're confident we will deliver on our full year guidance.
Now turning to our IP services business unit performance.
Hi, I'm impressed by the team's ability to continue to advance.
From a nonrecurring hardware reseller model to a trusted cloud services provider focused.
On longer term recurring service contracts.
As evidence of our growing expertise in this area.
We were recognized as the first service provider to achieve master level certification and all five Cisco cloud managed services.
Demonstrating our broad expertise across enterprise networks.
Aberration data centers and IP next generation networks.
Our innovative approach is resonating within our communications practice.
During the quarter, we added an impressive 15700 ucas profile.
Primarily driven by recent deal, but a fast growing restaurant as more than 700 locations spread throughout the United States.
In total we now manage 270000 profiles for more than 2000 business partners across North America.
Additionally, we sign New service agreement that will add $200000 in new monthly recurring revenue once fully implemented.
Turning to our cloud practice demand continues to be robust.
Filed revenue increased 15% year over year after excluding GE in sourcing initiative, which completed during the second quarter of 2019.
As mentioned last quarter. The cloud practice has 50 plus highly skilled software engineers with certifications across each of the public cloud platform.
As clients migrate from legacy solutions, they look to us as a trusted advisor.
Through this process, we're able to demonstrate our expertise and move our relationship with customers beyond transactional interaction to monthly recurring opportunities.
Moving to our entertainment communications business operating results remain strong.
After a decade up investment in fiber.
Our combined fiber network span over 17000 fiber route miles throughout greater Cincinnati and Hawaii.
And our wholesale business, we provide services for approximately 90% the wireless towers in Cincinnati and approximately 80% the wireless cell site in Hawaii and remain a preferred provider network services to other carriers.
For commercial business customers are recognizable brand as a next generation network provider has led to success based build outside of our traditional operating territory.
As evident we have recently won large commercial fiber builds and adjacent metropolitan areas, which provide additional opportunity to expand our superior consumer fiber services to neighborhoods with the highest return on investment.
Within our existing footprint.
Fiber to the premise reach a 60% other dresses in Cincinnati and 50% of addresses Connie I would have a lot.
Fiber the premise is a generational assets.
With a high barrier entry that consistently delivers high speed with unlimited bandwidth.
Simply put we provide the fastest and highest capacity broadband pipe to the customers' homes.
With that I'll now turn the call Randy will discuss our consolidated and segment results for the third quarter.
Thanks, Lee and good morning, everyone.
Slide five summarizes the company's third quarter performance.
Consolidated revenue totaled $383 million generating adjusted EBITDA of $102 million.
Turning to our entertainment and communications performance for the quarter on slide six.
Revenue totaled $249 million would Cincinnati contributing $171 million in Hawaii $78 million.
Customers transitioning away from lower margin linear video programming in favor of over the top solutions drove revenue decreases in both markets.
Adjusted EBITDA was $93 million up 2% year over year.
Cincinnati generated adjusted EBITDA of $68 million consistent with the prior year.
Why contributed adjusted EBITDA of $25 million up 13% from a year ago and remains on track to grow between five and 10% in 2019.
Moving to slide seven.
At the end of the third quarter, Cincinnati, Fioptics Internet subscribers, which includes a combination of fiber to the premise and fiber to the node customers total 247000 up 4% from a year ago as demand for our fiber to the premise internet products offset the declines from fiber to the node.
During the quarter, we added 3800 fiber to the premise internet customers in Cincinnati with penetration now reaching 45%.
Fiber to the premise Internet ARPU increased 5% from the prior year totaling $54, Walter and decreased 44 basis points to one dot 9%.
In the Hawaii market, we have added 7007 under consumer SMB fiber the premise internet subscribers since the close of the merger with penetration rates, reaching 32% up from 30% a year ago.
Internet ARPU increased $6 from the prior year now totaling $39.
Slide eight highlights our IP services and hardware segment results for the quarter.
Revenue totaled $141 million generating adjusted EBITDA $12 million up 4% and 3% from a year ago, respectively. After excluding the impact from G.'s decision to Insource certain cloud services.
Turning to slide nine as Lee mentioned earlier, the strength of our Ucas NAS and SD when offerings within the communications practice continues to outperform legacy declines with strategic revenue growing 37% year over year.
Year to date, we've increased NAS NFC when locations by more than 1000. Each we've also added 31000 hosted ucas profiles during the year.
Moving to the summary of capital expenditures on slide 10.
We have invested $167 million year to date, including $54 million for Hawaiian Telcom.
During the first nine months of 2019, we invested $28 million in construction cost to expand our fiber to the premise footprint in both Cincinnati and why.
Year to date consumer SMB fiber installation costs totaled $37 million in Cincinnati and $11 million in Hawaii.
As presented on slide 11 free cash flow totaled $34 million for the first nine months of 2019.
We ended the quarter with net debt of one dot $9 billion with leverage remaining consistent at four dot seven times liquidity was $162 million and we maintain a gross and well carry board of approximately $800 million.
We remain confident that our strong capital structure and liquidity enable us to execute on our strategic objectives.
As noted on slide 12, we're on track to deliver against our previously communicated full year revenue and adjusted EBITDA financial guidance.
We also continue to expect full year 2019 capital expenditures to be within the range of $215 million to $235 million.
Well now turn the call back to Lee for closing remarks.
Thanks, Andy.
I'm proud of the company's operating performance year to date and the progress achieved towards building two distinct and growing businesses.
This company continues to build superior asset deliver strong financial results well competing against larger companies.
We have also build a company and culture that gives back both socially and environmentally.
Today, we have financially supported numerous local charities and our employees have volunteered over 10000 surface hours.
On the environmental side, one vendor program helped us reduce 350000 pound electronics.
Queen do enough energy savings to power more than 1300 homes for a year.
As we enter the final quarter of 2019 and look ahead. The next year, we remain confident that our strategic initiatives have differentiated us for our peer group and positioned us for EBITDA growth in 2020.
We remain focused on applying a disciplined approach to capital allocation to drive profitable growth and we continue to evaluate alternatives to maximize stakeholder value.
I'll now turn the call over to the operator.
Open for acuity.
Thank you, Sir ladies and gentlemen, if he would like to ask a question today. Please press star and then one on your Touchtone phone.
If you are using a speaker phone set up today it might be necessary to pick up your handset are depressed the mute function. So the signal can reach our equipment.
Again that is star and then one if he would like to ask a question today.
And we'll take our first question from David Barden with Bank of America.
Hey, guys, it's Josh in for Dave. Thanks for taking the question two if I could.
How do you view the to changing demographic trends in Cincinnati, and Hawaii kind of impacting the pace of cord cutting and fiber adoption versus a national average.
And then secondly in Hawaii, it looks like DSL sub losses, there are still offsetting the fiber gains when when do you think that will flip positively. Thanks.
Thanks, Josh.
No I would say.
On the first question on the trends all answer that in and all that and to answer the second question.
I think we see.
We see the Nat what's happened in nationally here in Cincinnati and in Hawaii, We definitely see.
A demographic base shift as you mentioned two cord cutting we are watching things like yeah. The launch of Disney plus what that has the impact that has on a over the top adoption you know I think with more and more.
Ill ability.
On the tax side, you know look at look at what's happening with Apple TV.
You know a lot I do think there is a growing trend and it's going to continue and you know cutting linear television and I, we view that as a positive for US you know when you have very dense fiber network and you know you have your soul focus is building fiber to the premise and offer.
The the Bath and highest bandwidth tied to the home I think that out that the only that only give us is an advantage over time.
I will say that.
I talked to a lot of people around supply and demand and I think.
We have built.
More supply than there is demand.
And I think once that shift happens from the standpoint of usage on the consumer side.
Oh, I think we're in a better spot and so you know I as I mentioned in his script, we we feel like we're we've built a generational asset.
Where demand will only increase for bandwidth.
You know look at all the studies and we think we're in a great spot as that demand the inflection really meet supply and we become.
One of the.
The key suppliers, if not the only supplier a adams outdoor for truly symmetric bandwidth. So once you answer the second question sure. So as we've discussed I'm on multiple calls in the past really in Hawaii. The the big opportunity is driving fiber to the prim penetration and we continue to do.
Do that so when you look we're currently sitting at 32%, but but we clearly have a lot of opportunity to drive that upwards toward where we sit in Cincinnati, which is 45% so.
It will be a combination of driving further penetration from the 32% throughout throughout the remainder of 2019 2020 as well as new doors that we will open in 2020 as well. So when you take those two combination against kind of the fairly steady clip of fiber to the no <expletive> .
Line as well as DSL decline, we should we should turn positive all in in 2020.
Got it that's helpful. Thanks for taking the questions yes.
Thank you.
And I find next question will take Sergey Dluzhevskiy WESCAM co investors.
Good morning, guys.
Just a question kind of on one ones reports for the so if you look at.
Florida beyond.
They do services business and beyond divested as a core entertainment and communications business.
Do you see.
I said that where you might not get allocated for or I'm, not getting credit for that you could.
Possibly monetize downs arose wasn't as and I'm not central to strategy, whether it's real estate or anything else and things that would be used to surface value over short to medium term.
Yeah.
Yes, Sergei this is Lee yeah, absolutely I mean, you mentioned one big one for US a real estate we have.
You know a few projects going on right now really based around real estate consolidation, especially in Hawaii as you can imagine the when it whenever you.
Consolidated network, a real estate in Hawaii first the first and foremost it is expensive, but also as you can holiday electronics.
Cost of electricity in the savings available to you is substantial so we have quite a few projects going on at Hawaii around network consolidation Seo consolidation and what to do with real estate, we are real estate owner in Hawaii, So I'm I'm not sure that necessarily where we want to be long term there's probably.
Our next we'll always will always have some but I think there's opportunity there. So we're absolutely delving into that the little less prevalent in Cincinnati as the cost of real estate cost electricity is you know it's don't get as much Bang for your Buck, but we were constantly looking at assets beyond real estate I'm not I mean, our other probably the.
You know our other most liquid asset is the I.T. services business as we mentioned the path you know, we very intentionally building two companies up and so you know we've always got optionality around that but beyond the you know N C.
He services those are our main two companies were Casa looking asset, but real estate would be probably the biggest one.
Okay. That's helpful.
Ah think and I guess, a bigger question also related to what you just mentioned so.
Stock has been obviously under pressure and innovation engine public market continues to be.
So as you look at your business in addition to operational execution.
What options alternatives do she is if you believe wouldn't be effective in unlocking value and eliminate things is just getting buttons intrinsic value.
Fiber centric business and valuations that are so far versus in public markets.
Yeah, I mean, it's a great question I think one of the things we.
Suffer from its just a.
Kind of us sector overhang is I'll be kind and just say that in a lot of it at least you know last several months.
To me focus others around the credit markets.
You know, we're obviously, okay from a balance sheet standpoint, and we are debt maturities, we have plenty of time, but but I've been very honest about this the fact that this doesn't turn you know we do have options and you know we see a path over the next several years of getting our.
Our leverage down into threes, and I think that's a good place to be.
When you are going to refinance your long term debt.
That would be our goal and I think in doing that in this environment, we would unlock a lot of value as you know the perception of high leverage.
In this industry given what's going on in the sector. I think has had a lot of has resulted in a lot of the downward pressure and so we feel like we've got a solution for it or our solutions. We you know we still manage our cash very closely a we have as you're well aware and very intentional about investing in five.
Labor.
And testing our own cash I think what you've seen from our teams is that we've been able to hold leverage a very consistently over the last several quarters. So we're very focused on it and we we do see a path when we execute that is really just you know look we're watching the we're watching the market.
Cuts and where you know.
We're going to take full advantage of our options when.
At times right and right now we don't have to do anything we have plenty of cash to do exactly what we're doing we're executing.
You know the yeah I'm a believer stocks you know socs are portal. They go up a they go down they go back up again, right and so as long as we keep executing that's the one thing we can control and his team continues to do that Ah. So I see a good path forward, but right now we're focused on execution.
So you mentioned leverage.
Ideally where would you like to be given.
For the Florida.
What does the optimal leverage.
Oh.
The company was your size and the nature of U.S.
I think in the Threed. This fine I mean look to be counted in the force was fine until.
Certain.
Issues arose in our sector you know look we're a very capital intensive industry.
And you know.
I've read a lot recently on you know what the narrative is in the sector and what needs to happen well what needs to happen as investment you need to invest in fiber companies like ours need to invest in next generation networks, we've done that and we continue to do that.
Others need to do that.
You know our leverage as high because we reinvested in fiber as an example.
You know, we've got great asset, because but do due to that fact.
No we have high leverage now again.
I'm sort of watching the trends and I'm going to that's going to really dictate overtime, what we need to do from the standpoint of leverage but I think if you're in the three easier and I really great and a great place I think in the I. I think you've seen from us in the fourth is absolutely manageable under our current credit card debt structure and capital structure.
Right.
I think threes will be fantastic, but.
It's just dictates the kind of its dictated by the tone of the markets and right now a the tone isn't good and we're watching very closely.
And my last question is about Hawaii. So I mean, you are making progress in terms of integration.
Assets and basically the driving operational performance. So as you look into 2020, what are your top to top three operational priorities for Hawaii, what would you be booking particular emphasis on in 2020.
On the ones.
[noise] his or her games as Tom the good top two priorities in Hawaii is really we're starting real estate consolidation.
'cause it consolidates and central offices, and really business and consumer sales focus we're still.
Pushing in fiber penetration in the consumer market and we're starting the my way TV launch, which is a skinnier bundle <unk> launched this quarter.
It's really continuing to push up penetration on sales front and push the IP integrated services and business voice and all of that pulls back inside of that business sales.
Thank you.
Thanks, Larry Thanks, sorry.
And our next question comes from Botch out Levy with yes.
Thank you couple of questions given the optimal leverage industries Hot how should we think about the incrementals fiber build opportunity in the market. But also you were contemplating maybe doing some overbuild some projects going forward.
What does this suggest in terms of Capex plan have we seem to peak and where it was gonna start to see that coming down.
And another question on operations can you provide a little bit more color on that keep yards, you're seeing in October and maybe the competitive environment is there any changing connect.
Or churn given the price increases that charter in cemented.
<unk>.
Thanks, a lot to on the build side I think the way to think about we definitely saw the peak a few years [laughter] no. We won't be building not aggressively I would say that the way to think about our capex right now sort of steady state I would say that.
What you saw 19 is what I would consider very steady state now. It now then you look at where you're investing I would say that you're going to see.
Less investment that we're not going to end our investment in our you know in Cincinnati as an example, but we are seeing a lot of opportunities as we edge out an overbuild we've won some deals.
Territories right outside of Cincinnati on the business side that have allowed us to build fiber.
Up to those markets and I'm also a lot of to take advantage of that fiber and building a consumer neighborhoods and when you do it in that and and not order you when the business first build the fiber line then you spur offer that fiber what we found as we saved on the consumer now doors, we set up 15% on the bill.
Yes.
Roughly when when we.
Go to engineer those doors that to me that's a great strategy right. We also look at those incremental doors or we're not you know cannibalizing part of our own business. These are truly incremental wins for us and that's exciting for US also so we are gaining traction on a territory.
We're seeing other business type solutions or.
At least where being.
We're being sought after I guess is the best way. So our reputation is good in the area and we're being sought after so look I think it's got a very.
Positive.
Impact on our capital spend going forward, but I would say the majority that would be in that overbuild category and less.
In Cincinnati, you'll see us kind of trending out of territory.
The same would be in Hawaii, and Hawaii, you know look we're going to slowly build we're going to use government subsidy to build but its going to be very slow steady build so you won't see any kind of aggressive build out of us moving forward. It really does.
Come down to managing cash flow and managing our leverage ratio and in this environment, we see that not as being the most important element and that what we're doing so steady execute this steady execution with steady build.
You want to you want to answer the metrics question Andy.
Yeah, Batu <unk> I apologize wage with Honda, Bob, but you're on the competitive nature of the.
We're not seeing any of the any changes in the KP eyes, given spectrums. Most recent announcement on pricing we've been very very focused since last year.
On reducing churn.
As as I think you probably remember us talking about ARPU management, and we've stated you shouldn't be focus as much on ARPU, because what we are going after as retention.
We believe that keeping customers is much more important than us going after what I call. These.
Vanity metrics on the consumer side, you know I could I could ask Jason Prader, and Tom <unk>, who runs Cincinnati I could ask John Canadian why Hey, give me subs and they could get subs overnight. It's just not to subs that we really want our investors really wants to have because they churn out they cost you a cash you don't make any money.
He from them. So what we've really focused on is really diving into what are the subs, we want and won't want to keep I think that's what you're seeing and our turned numbers and the improvement our churn numbers.
We've seen no movement, yet from charters announcement, not saying that we won't but there's been no very little time since the end up being out than on the pricing and botch I, what I would add to that I would anticipate that we would continue to see as a result of everything we just said.
Continued improvement as we shipped more and more away you see it in our numbers from fiber to the node DSL as those continue to come out of the base. We are we are then left with fiber the problem subs that that and we've said this over and over its a superior product as we see more and more demand for bandwidth folks.
Our our making their way to the fiber product because they need it and to lease points away, we're managing that to ensure that they were not to pricing them.
We see them.
We're seeing stronger churn metrics year over year, and I would anticipate will continue to see that as that trend continues.
Got it thank you.
[laughter].
And we'll take a question from Jay My ears Swiss credits.
Hi, Good morning, guys. Thanks for taking the question wanting to maybe dig into that churn or aspect a little bit more. So obviously you highlighted an improvement on a year over year basis.
A little bit of a step up both in.
Cincinnati and Hawaii.
Number you Kinda noted last quarter that there was that price event.
Cincinnati during Twoq, you and then one in Hawaii and this quarter, maybe just any additional color there the trend impacts are saying thank you.
So obviously anytime that that we pushed through a price increase we anticipate that we're going to see some impact on churn, but the way that we've been managing this year Lee mentioned it moments ago. We are looking very closely on on a sub level basis.
And taking a look at that the contribution margin is coming through and are very closely managing the kind of promo exmar moment, which is a big moment that can that can drive churn. So we'll continue to push through price increases how we manage the base on a go forward basis will be consistent with what we've done in 2019 and that is taking a look.
But the overall contribution margin and ensuring that when price increases happen.
We do so in a logical way and don't don't push the subscriber out so again that goes back to how we're managing the base are very intentionally not chasing video subscribers ensuring that the customers that we do have stayed with us long term.
Great. Thank you.
And we'll take a question from Ben brokered deer with Odeon capital.
Hey, Thanks for taking the question I'm just kind of question regarding the de leveraging initiative I know you said you wanted to get down in Q3.
But my question is based on your Capex being kind of Debbie.
Number you reference to 15 to 35, you guys are generating a little over 400 million EBITDA per year.
And kind of given the interest payments and pension and OPEB payment.
I'm wondering if you're trying to get it can pull math around.
EBITDA last year cash flow.
Just wondering how you plan on Craig's de leveraging kind of three visit.
Just pure EBITDA growth is there kind of non core.
On Monday and debt Paydown associated with that I mean could you kind of your simple math around you pick up I like your cash like.
It doesn't really pay much of I think de leveraging free cash flow picture. Thank you.
Yes, so a great question.
You you said it it's a combination of growth in EBITDA.
M&A and proceeds of M&A the go towards paying down debt ultimately, we've been pretty honest about everything we do you know we have two companies.
Ultimately if need be you know, we sell assets and we get down to the threes watching it very closely the credit markets, but it's just a combination of those those two things get to them the threes.
I I understood, maybe I could add one more real quick as well.
Then.
Videos sale that was caught that was completed late summer early fall. They go on time.
I wish in multiple on the buy out.
Obviously, I like that metric as a comparable care could be T. R.
Wondering kind of based off that multiple evaluation, if there's been any.
Hi, good discussions around you know what kinda give you the after tax advantage of that over that call. Thank you.
Ah, yes, there's been strategic discussions.
Thank you very much or time guys appreciate it.
Thanks.
And there are no further questions at this time I would like to turn the conference back over to lease Socs for any closing remarks.
Just want to thank everyone for joining to the call today. We appreciate your interest in Cincinnati Bell and we look forward to speaking next quarter have a great day.
[noise] and ladies and gentlemen that does conclude today's conference I. Appreciate your participation today you may now disconnect.